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Review of Finance Advance Access originally published online on October 18, 2007
Review of Finance 2008 12(3):533-565; doi:10.1093/rof/rfm028
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© The Author 2007. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Suppressed Negative Information and Future Underperformance*

Anna Scherbina

University of California at Davis

I present evidence of inefficient information processing in equity markets by documenting that negative information withheld by securities analysts is incorporated in stock prices with a significant delay. I estimate the extent of the withheld negative information based on the proportion of analysts who stop revising their annual earnings forecasts. This measure predicts negative earnings surprises and negative price reaction around earnings announcements. It could also be used to generate profitable trading strategies. I show that institutions tend to sell their stock holdings as my measure of unreported negative news increases, thus ameliorating the mispricing.

JEL Classification: G12, G14, G20

* This paper was previously circulated under the title "Analyst Disagreement, Forecast Bias, and Stock Returns." I am grateful to Torben Andersen, Kent Daniel, Kathleen Hagerty, Ravi Jagannathan, Narasimhan Jegadeesh, Bob Korajczyk, Joel Lander, Tom Lys, Bob McDonald, Iwan Meier, Christopher Polk, Todd Pulvino, Erik Stafford, Beverly Walther, Volker Wieland, two anonymous referees, and seminar participants at MIT, the NBER Behavioral Finance Meeting and the WFA meetings for many valuable suggestions. I would also like to thank I/B/E/S for making its dataset available for my research. I am responsible for any errors.


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